The EU budget negotiation, now a month away, promises to be David Cameron’s next big European test. The Prime Minister has repeatedly declared that he wants to see the EU budget frozen at 2011 levels and that he’s prepared to use the need for unanimity to achieve that.

The Economist this week has a very useful scene-setter for the budget talks. It sketches the contours thus:

‘Countries are coalescing around loose (yet often divided) groups. There are the ‘friends of cohesion’: the net recipients of regional spending, such as Poland, Hungary and the Baltic states. And there are the ‘friends of better spending’: the net contributors, such as Germany, France, Britain and several northern European states. Less organised are the supporters of farm subsidies under the common agricultural policy who straddle both camps, including France, Spain, Italy, Ireland and Romania.’

As with so much in the EU today, what actually happens will depend on Germany. Given that Germany would suffer from a budget impasse, it will want to see a multi-year budget agreed. But as The Economist points out, Berlin’s position is complicated:

‘It says the budget should be capped at 1 per cent of the EU’s gross national income (reducing the commission’s plan by about €130 billion), but is being pulled in many a direction. As an advocate of austerity, it sympathises with the British. But as a big recipient of farm subsidies, and as the other half of the Franco-German partnership, it may collude with France to preserve agricultural spending. And it will want to keep supporting the EU’s ex-communist members around and beyond its eastern border.’

What’s for certain is that domestic politics will play a crucial role in the talks. Angela Merkel is acutely aware that she has an election to fight next year and is displaying a certain impatience with Cameron’s demands, hence the threat conveyed by the front page of Monday’s FT.

But Cameron knows that neither his party nor the country would welcome the EU budget increasing while cuts are made at home.

Tags: Angela Merkel, David Cameron, European Union, UK politics